SEC targets SUHSD, ex CFO


On Sept. 16, the Securities and Exchange Commission announced that it charged the Sweetwater Union High School District, and its former chief financial officer Karen Michel, for misleading investors who purchased $28 million in municipal bonds from an order against Sweetwater and a complaint against Michel in 2018.

According to the order, both the District and Michel provided investors with “misleading budget projections,” indicating that the District could cover its costs with a general fund balance at the end of the year of $19.5 million, when in fact it tracked to a negative $7.2 million ending fund balance.

Michel managed the bond offering for the district and was aware that projections contradicted actual known expenses. Sweetwater and Michael included the false projections in the April 2018 bond’s offering documents, provided them to a credit rating agency, and omitted contradicting internal reports, not accounting for actual expenses. The complaint against Michel also alleged that she signed multiple certifications confirming the accuracy and completeness of the information included in the offering documents.

Without admitting or denying the findings of the order, the District submitted an Offer of Settlement which the Commission accepted, with the Order imposing a Cease and Desist Order against the District. The order found that the misleading budget projections were primarily the result to budget for a 3.75% pay increase approved shortly before the beginning of the 2018 fiscal year, instead projecting identical projected expenses in its 2017 fiscal year. Sweetwater made no effort to bring its budget in line with actual expenses and continued to use “stale budget projections” in its interim budget reports that were incorporated into misleading disclosures to investors and industry professionals in bond offerings.

“Days after the June 2017 approval of the salary raises, Michel and the Sweetwater staff working under her direction completed the proposed budget for the July 1, 2017, through June 30, 2018, fiscal year (the “2018 Fiscal Year”). This budget was approved and adopted by the Board on Michel’s recommendation. The adopted budget, however, failed to accurately account for the 3.75% salary increase, and instead anticipated a less than 1% increase in employee salaries based on year-end estimates for the prior fiscal year. The adopted budget further projected that Sweetwater would end the year with an operating surplus and a positive general fund balance of over $22.2 million.” On February 26, 2018, Sweetwater’s Board voted to approve the issuance of $28 million in general obligation bonds, and to authorize Michel to act on behalf of Sweetwater for all the District’s tasks essential to the offering. The bonds were to be secured by and payable from ad valorem property taxes assessed on taxable properties within the school district and collected by the County of San Diego. The purpose of the bonds was to fund certain of Sweetwater’s capital projects. Around September 2018, Michel retired from the District and replaced by a new CFO who completed its unaudited actual financial report finding that the year end salary expenses were $18.7 million higher than estimated, dropping the general fund balance to a negative $2.87 million, approximately $22.4 million less than reported in the Offering Documents.

“Pursuant to Section 8A of the Securities Act, Respondent Sweetwater cease and desist from committing or causing any violations and any future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act.”

Within 180 days of the Order, the District must establish appropriate and comprehensive written policies and procedures, periodic training regarding all aspects of the districts’ municipal security disclosures, retain an independent consultant with municipal finance experience for a period of two years, adopt all recommendations contained in the independent consultant’s report within 90 days, and certify in writing the terms of the settlement in any final official statement , providing written evidence of compliance.
SUHD provided the following response in query to the SEC order.

“Sweetwater Union High School District (the “District”) has entered into a settlement agreement with the U.S. Securities and Exchange Commission (the “SEC”), resolving a previously announced investigation into disclosures made in connection with the 2017–18 budget and an April 2018 General Obligation bond offering. This settlement resolves all outstanding SEC claims against the District and represents another positive step in the District’s ongoing remedial efforts to continuously evaluate and improve its fiscal health. As required by the SEC’s order, the District neither admits nor denies the findings or charges in the order.

“Under the terms of the settlement, the District has agreed to retain an independent consultant, who will review and make recommendations to the District’s written policies and procedures regarding the District’s municipal securities disclosures. The District looks forward to implementing the improvements and changes outlined in the SEC’s order. It will continue to take steps to ensure it provides accurate disclosures and information to the public.”

The SEC’s complaint against Michel, filed in U.S. District Court for the Southern District of California, charges her with violating Section 17(a)(3) of the Securities Act of 1933.

Without admitting or denying the allegations in the complaint, Michel agreed to settle with the SEC and to be enjoined from future violations of the charged provision as well as from participating in any future municipal securities offerings. She also agreed to pay a $28,000 penalty. The settlement is subject to court approval.


SEC targets SUHSD, ex CFO